Monday, 12 February 2018

RBS and the Government: Good Cop and Bad Cop

In the first of two posts today that focus on the banking
sector, we will start by looking at the troubled bank RBS. We have looked at
RBS on a large number of occasions here in Financial
Regulation Matters, with posts ranging from its incredible
losses since the Crisis, the bank trying
desperately to keep its high-ranking officials (mostly former) out of the court
room, and also its appalling
treatment of SMEs. In continuing the first and third areas of focus, news
recently adds developments to these stories which detail a bank on its knees.
However, by adjoining these analyses with the examination of the Government,
its regulators, and also Parliamentary committees, the bank’s future comes into
focus and is, seemingly, in a particularly precarious phase for a number of
reasons.

Looking first at the issue regarding the bank’s treatment of
SMEs, via its notorious ‘Global Restructuring Group’, we are no strangers here
in Financial Regulation Matters to
the developments in this story, and of the appalling practices of, essentially,
running SMEs into the wall and collecting the pieces and the fees – a practice
made famous by the ‘rogue’
unit within HBoS. The allegations have come in their thousands, with
concerted campaigns aimed at bringing these practices to light, but one can
only focus on the ‘alleged’ practices at the bank because, up to this point,
the FCA has played
its part in protecting the bank by commissioning reports and then heavily
censoring them and releasing only snippets. However, after a movement
by the Treasury Select Committee, headed by Nicky Morgan, it appears
finally that RBS’ practices will come to light so that we can all know,
hopefully, exactly what they have been doing – and then, hopefully, see some
particularly impactful action taken for this despicable practice. It appears
this way because, today, it was announced in the business media that the
Treasury Select Committee has won
its battle with the FCA to release the full report to them, with Friday
being set as the deadline to either publish in full or release the report to
the MPs. It is being reported today, however, that the FCA are still attempting
to resist these attempts, although MPs are growing considerably exasperated at
developments with many now pushing for full publication. The original excerpt
released by the FCA stated that it did not believe that RBS deliberately
undermined companies for profit, although there was ‘widespread
mistreatment of firms’ and that 16% of cases resulted in ‘material
financial distress’; the conflicting information has increased the pressure for
full publication. Speaking to the Treasury Select Committee last week, RBS
bosses were adamant that cases were ‘isolated cases’, although a Labour MP who
has the full report stated that these accounts equated to ‘misleading’ the
Committee, as the report suggests that this treatment of SMEs was ‘systemic’ in nature. It
is this conflict that has led to Morgan demanding that, by Friday, the FCA
release the full report because ‘it is unreasonable that,
four years since the review was commissioned, and 18 months since the FCA received
the final report, such slow progress has been made…’. Yet, today’s headline
in The Guardian that the ‘confidential
report into RBS small business scandal “to be published” may be a little presumptuous,
as the FCA has demonstrated time and time again that it will protect RBS
because of one massive reason – the effect of its publication.

Whilst the endeavours of the Treasury Select Committee is,
on this occasion, to be applauded, the reality of the situation is that the
bank simply cannot afford these details to be published at the moment, and the
FCA know this. This should not be a reason to restrict justice, but the bank is
facing the prospect of declaring its tenth
annual loss and the effects of this scandal, in terms of perception and cost,
could prove to be terminal. It is for this reason that the Treasury, as it was
reported over the weekend, has been cited as approaching the U.S. Department of
Justice to expedite the impending fine coming RBS’ way for its performances in
the U.S. market before the Financial Crisis; reports
suggest that the Treasury is asking the DoJ to bring forward its fine, which is
expected to be more than £5 billion. The suggestion stemming from these
meetings is that the fine could be coming in the next few weeks rather than
months, but the details mask an underlying sentiment; why are the FCA taking on
MPs to protect RBS and why are the Treasury using their political capital to
intervene on the bank’s behalf? There are probably many reasons for this, but
perhaps the most impactful one is that RBS is simply approaching the point of
no return, and the Governmental departments know it. The real question then is
(a) will the bank be allowed to fail, and (b) what would the effect of the
global banking giant be?

What these developments tell us is fascinating. On one end,
there are members of the political elite who are determined to promote justice
in the face of the flagrant disregard for good business practices and, in
truth, illegality. Yet, the developments tell us that the larger picture is
always in focus, and protecting consumers goes out of the window when it comes
to protecting the system; consider
this – the regulator in charge of protecting consumers (it is even in its
name!) is actively preventing
consumers from achieving justice, and the Governmental department which is
tasked with representing the citizens of the U.K., in fiscal terms, is actively working with other
jurisdictional departments to present a more comfortable situation for a bank.
The effect of these developments is far-ranging, and particularly enlightening
to those who choose to observe a shallower level than the systemic level – RBS is
failing because of its incredibly poor performance over the past decades, but it will not be allowed to fail because,
with all the uncertainties in the current climate, its failure will cause
lasting damage. So, what can we learn from this? One thing we can learn is that
the Crisis was a warning that has not been heeded and, ultimately, the problems
that caused the crisis still persist; Friday will be a telling day for a whole
host of reasons.

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